By Ploy Ten Kate and Michael Perry
BANGKOK (Reuters) - Thailand's central bank on Wednesday expressed concern over inflation, as business leaders fear a wage-price spiral if the newly elected government goes ahead with billions of dollars in spending.
Prime Minister elect Yingluck Shinawatra's opposition Puea Thai Party won a landslide election victory on Sunday on a platform of populist policies which include wage rises, a household debt moratorium and better welfare and healthcare.
Another concern for investors is the future of the baht currency after a Puea Thai senior economic advisor told Reuters on Tuesday it should be managed.
But Yingluck on Wednesday said the baht would continue to float freely, the Wall Street Journal reported.
One of the party's promises was a minimum wage increase to 300 baht ($9.8) per day, as much as 90 percent higher than the current minimum set for each province around the country.
That would be a huge amount for manufacturers to absorb, said Richard Han, CEO of integrated circuit packager Hana Microelectronics Pcl.
"Two things will happen: either they will make less money or they'll try to put their prices up and cause inflation ... This could put you on a (wage-price) spiral," he said.
Annual inflation in Southeast Asia's second-largest economy hit 4.19 percent in May, its highest since September 2008. It stood at 4.06 percent in June.
"High inflation will hurt people's purchasing power and as a result may affect consumption," said Governor Prasarn Trairatvorakul, adding the new government's policies would be considered at a policy meeting on July 13.
Economists expect the Bank of Thailand to raise its policy rate by a quarter of a point to 3.25 percent at that meeting and see it at 3.75 percent by the end of 2011 rather than the 3.50 percent they had expected before the election.
FUTURE OF BAHT
Puea Thai's Suchart Thada-Thamrongvech, a candidate to be finance minister, had said Thailand should adopt a managed exchange rate. His comments would concern investors as they question central bank independence. Such a move would mark a turnaround for Thailand, which abandoned a fixed exchange rate system in 1997.
But Yingluck said there were no plans to change the existing system.
"We will continue to let the baht float freely," she said in an interview with the Wall Street Journal, posted on its Website (http://online.wsj.com).
The central bank chief said he expected foreign money to flow into Thailand in the second half of 2011. But business leaders said a rising wage bill may deter offshore investors.
"Foreign direct investment is still a key foundation that drives the economy in this country," said Viboon Kromadit, chief operating officer of industrial land developer Amata Corp.
Higher wages could also undermine exports, especially in agriculture, damaging a sector that employs millions.
The Thai economy expanded a robust 7.8 percent in 2010 and is projected to grow 4.0-5.0 percent in 2011, fuelled by strong export growth and increased consumption.
Businesses urged the new government to proceed slowly.
OIL PRICE SUBSIDIES
Yingluck called a strategy meeting on Wednesday to review urgent action to "revitalise" the economy, saying a priority could be slashing prices of gasohol, benzene and diesel by removing a levy on them used to subsidise other fuels via a state Oil Fund [ID:nL3E7I61B8]
"We will consider measures that can be taken immediately after taking office," she told reporters.
But dropping the oil fund could backfire if world oil prices rise leaving the government unable to stop rising local prices.
Sunday's election result was seen as a rejection of Thailand's traditional establishment of generals, "old money" families and royal advisers who backed the outgoing government.
Analysts say the election should usher in a period of stability after six years of often bloody political crisis.
Thailand's politically powerful military has said it will accept the result, adding to a sense of stability in a country plagued by unrest since the army staged a coup in 2006 to oust then Prime Minister Thaksin Shinawatra, Yingluck's brother.
The question of whether Yingluck will seek the return of Thaksin, now living in self-imposed exile in Dubai after being convicted of abuse of power, remains open. Analysts say his return could spark a new cycle of unrest in Thailand.
Yingluck said her brother's case would be reviewed as part of national reconciliation, but denied she had a policy of bringing him home.
(Additional reporting by Vithoon Amorn, Khettiya Jittapong, Kochakorn Boonlai, Saranya Sumsomkij, Pisit Changplayngam and Pracha Hariraksapitak; Editing by Martin Petty)
